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Retirement > 401(k)s & IRAs
Your top Roth questions
September 6, 2000: 12:10 p.m. ET

The Roth IRA has generated interest - and a lot of confusion
By Ed Slott
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NEW YORK (CNNfn) - You probably never thought Roth IRA tax rules could get people so riled up.

But my column last week on the topic generated several e-mails from people who had lengthy comments as well as detailed questions. It shows that even the most basic tax rules about the Roth are confusing people.

So I thought I'd respond to some of your questions and comments in today's column.




Visit Ed Slott's irahelp.com





Question: I understand you will pay taxes on the converted amount, but exactly how? Is the amount converted added to your adjusted gross income for the year? Would the conversion then push you closer to the $100,000 income limit for married couples? Or is the conversion amount excluded from your adjusted gross income in calculating the $100,000 income limitation?

Answer:  The conversion amount is taxed at your regular income tax rates. It is included in your Adjusted Gross Income (AGI), but the conversion amount is not included as income for Roth IRA eligibility. For example, if your AGI without the conversion income is $90,000 and you convert $60,000, your AGI will be $150,000, but you will still be eligible to convert to the Roth IRA because the $60,000 conversion income does not count towards the $100,000 Roth conversion eligibility limit.

graphicQuestion: I just read your article regarding Roth IRAs and thought you might be interested in our experience. In 1988, my then-girlfriend and I both started Roth IRAs. We also converted her traditional IRA to a Roth, as she earned well under the $100,000 limit. So far, no problem. In June, we purchased our first home, and got married in August. We had our taxes done that year by an accountant, who informed us that the conversion we had done before we married was now illegal due to our combined income! Incredible as this was to us, we agreed to follow his recommendation to re-characterize.

Unfortunately, he didn't tell us it had to be done by April 15, and we didn't get around to it until after that. When the government moved the deadline to October life got a little better. But the financial institution still managed to screw up the recharacterization repeatedly.

I'm telling you this because I have a slight, but significant, point to pick with what you said in your article. You wrote: "For some strange reason that $100,000 limit is the same whether you are single or married. So don't marry anyone before you convert!" We did exactly as suggested, but got screwed anyway. Obviously, you know far more about this than I, but if I may, I suggest changing the wording to be "For some strange reason that $100,000 limit is the same whether you are single or married. So don't marry anyone the same year you convert!" Perhaps this might save some folks the trouble we had.

Answer: Your point is well taken. You are exactly correct. Although I said it in jest to make a point, I should have said the "same year you convert" as you suggested.

The reason for not getting married the same year you convert is because for tax return purposes, your marital status is determined as of the last day of the year, Dec. 31.




Read Ed Slott's recent columns on the three most important decisions you'll make with your IRA: Choosing a beneficiary, picking a life expectancy and picking a distribution method.




Therefore, if you converted early in the year as a single individual, and were married on Dec. 31 of that year, you are considered married for the entire year and must add your new spouse's income to your return for that year.

That additional income will push many working couples over the Roth IRA $100,000 conversion eligibility income limit. For those who did not see last week's article, you cannot get around this tax trap by filing married-separate. If you file married-separate the tax law disqualifies you from converting, regardless of your income.

Question: Here's a question I can't find the answer to in books, etc., but the CNNfn.com IRA planner tool indicated it would be legal: My wife and I are both under 55 and have both left our jobs, so we have no earned income, only investment income. Next year, our AGI will be under the limit for a Roth IRA conversion, and we each have old regular IRAs that we're pondering converting to Roth IRAs. Can we do that without any earned income?

Based on the model I saw, I couldn't open a new Roth IRA and contribute to it (earned income must exceed contribution), but it looks like we could each do a Roth IRA conversion while our AGI is less than the conversion limit. Your thoughts please?

Answer: You are correct. You do not need earned income to convert to a Roth IRA. The only qualification is that your income does not exceed $100,000, which is no problem for you. You also cannot convert if you file married-separate. Other than that you can convert all you like, even if you had no earned income for the year you converted.

Question: I'm not a CPA, but I believe that some information contained in your Roth IRA article may be incorrect. You state that if a taxpayer earns an income of $95,000-$110,000 in a tax year, then the taxpayer is not eligible to participate in a Roth Ira. Isn't the criteria adjusted gross income (AGI), not income? If so, then the eligibility consequences would be quite different.

Answer: Thanks. You just gave me a great idea for a column!

The article is correct. I use the broad term "income" so that I do not get sidetracked and spend the entire article explaining what "income" is. The income figure is also not Adjusted Gross Income (AGI), and that is why I purposely did not use that term.

The correct term is actually "Modified Adjusted Gross Income" (MAGI), which begins with AGI and makes certain adjustments. The biggest adjustment would be deducting any conversion income from AGI, because the conversion income itself does not count as income in computing MAGI. There are several other minor adjustments. I'll write a follow-up article explaining exactly what "income" is for Roth IRA purposes. I will use your email to tell readers why I think it is important to define terms before I use them.

Thanks for the feedback and a great idea. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.